Brad Brain: The price of dithering

brad-brain

Okay, so to be clear, there is a lot of confusing stuff happening right now, and everyone’s situation will be a little different, so be sure to check with your investment advisor as to how this applies to your own situation.

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But that being said, I expect that more money could be “lost” by people who are in a position to buy long-term quality investments on sale, but for some reason they dither and delay as they wonder when is the “right time” to buy, than money that will be “lost” by people who buy in too early. In other words, some people will wait to buy but end up missing the sale altogether, and that can be worse than someone who buys early only to find the prices get a little cheaper still.

Here is the thing. We have an entire financial news industry that is built on the premise that there are pundits that can tell you with certainty what will happen in the next five minutes. But that’s a charade.

Don’t get me wrong. I am not saying that making rational decisions that are consistent with your objectives is misguided. I am also not saying that if you buy wonderful businesses run by honest, hard-working and ethical people, in industries that have a bright future, and when you find these businesses you acquire them at cheap prices and hang on to them for the long-term, is a bad way to build wealth. Indeed, the majority of my work is based on these simple truths.

What I am saying is that we have entire television channels and investment periodicals devoted to the idea that they can pull back the curtain for subscribers, revealing untold mysteries, and all you need to do is follow their programming because they really, really know for sure what will happen next.

None of this is new. Years ago renowned mutual fund manager Peter Lynch famously said, “Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”

The problem is that when people base their financial decisions not on what they need to do to reach their financial objectives, but rather on what the guys on TV are saying, then we can have random results.

Here is the reason I am writing on this. I do not think that when the markets recover it is likely to be a gradual, measured response. Rather, I expect big chunks of the recovery are likely to happen very quickly, maybe even over a few days. If you miss those days then you miss a large part of the recovery.

Here is a fantastic illustration. AGF Management Ltd. has calculated that if you were fully invested in the Toronto Stock Exchange Index for the twenty years ending December 31, 2019 your total return would be 6.25%, not including dividends. You would have gone through Y2K, the Tech Wreck, the Great Recession, and now this. Lots of bad days along the way.

But lots of good days too. And its these good days that do the heavy lifting on your results.

If you missed the top ten days in the last twenty years – just ten days out of twenty years – the results drop from 6.25% to 3.07%. Those ten days took a twenty-year return down by more than half.

Even more dramatic, if you took out the top forty days out of the last twenty years the return drops from 6.25% to -2.37%. Miss the big days and you miss the performance.

Food for thought for those waiting on the sidelines before putting money to work.

Brad Brain is a Portfolio Manager with Aligned Capital Partners Incorporated (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. Market data courtesy of AGF 2020 Quick Reference Guide, March 5, 2020. The views expressed are those of the author and may not necessarily be those of ACPI. Content is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.

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